by Bill Singer
No, I can't pretend that you never told me to buy Facebook. Waddya mean I exercised unauthorized discretion?
It likely happens everyday on Wall Street. A customer calls a stockbroker with an order. The order gets entered and executed. Uh oh, the stock crashes.
A dispute about the order arises (either sincere or phony) — the trade resulted in a loss and the client is not happy. Quite often the disgruntled customer will say that there was no firm order, only a discussion and the broker was never authorized to move forward with the now disputed buy or sell.
Bill Singer
On the other side of this dispute, the broker will say that he or she was given a firm order and this is nothing more than buyer’s remorse over a losing trade.
Look up any recent span of arbitrations and lawsuits. You’ll see such allegations and defenses raised in many cases. And it’s not just an issue of some boilerroom huckster or a quality indie/regional broker-dealer. This problem plays out at Merrill Lynch, Morgan Stanley, Wells Fargo, JP Morgan, and every firm you can name. Take a high-flying stock like Facebook or a volatile ETF and you’ll see the footprints.
Where the customer complaint takes on an interesting nuance is when the customer says to the stockbroker something along the lines of yeah, I’d like to make that trade today but I’m not sure when or at what price — I trust you, use your discretion. That’s the old “Time And Price Discretion” dilemma.
A more complicated issue arises when the conversation ends along the lines of the customer asking the stockbroker to keep an eye on a stock and, you know, if you think it’s time, this week, this month, whenever, get me in or out — maybe $5,000 or so or, hey, up to 10% of my assets but if you sell my XYZ position in the interim, maybe a bit more.
In many such customer disputes, the brokerage firm will settle the claim or pay an arbitration award. Thereafter, depending upon the relationship with the subject stockbroker, things may move along as if nothing happened or we wind up in litigation with the former employer seeking some contribution or indemnification from the former employee.
Case In Point
In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in October 2010, Claimant Morgan Keegan & Company Inc. asserted:
- refusal to repay sums pursuant to a promissory note;
- refusal to repay sums pursuant to a professional designation expense reimbursement agreement;
- breach of contract/contribution and indemnification; and,
- unauthorized trading.
The causes of action arose in connection with Respondent Rotundo’s alleged unathorized trading in a client’s account and his subsequent termination by Claimant. Claimant Morgan Keegan sought compensatory damages of:
- $12,389.15 pursuant to a promissory note;
- $720.00 professional designation expense reimbursement;
- $489,230.00 alleged unauthorized trading damages;
- 10% interest: and
- Attorneys’ fees and other costs.
In the Matter of the FINRA Arbitration Between Morgan Keegan & Company, Inc., Claimant, vs. Alejandro Rotund0, Respondent vs. Jose de la Lama and Michel Rittenberg, Third-Party Respondents (FINRA Arbitration 10-04775, June 7, 2012).
Respondent Rotundo generally denied the allegations, asserted various affirmative defenses, and asserted and Counterclaim and Third Party Claim for:
- defamation;
- breach of employment contract;
- declaratory relief;
- breach of equitable and just principles of trade;
- tortious interference with advantageous business relationship; and,
- unjust enrichment.
Respondent Rotundo sought unspecified monetary relief; and the FINRA Arbitration Panel’s Declaration that his conduct from approximately September 1, through September 3, 2010, was consistent with industry standards of conduct, practice and procedure. Further, Respondent sought an expungemetn of his Form U5 to reflect that the “Reason For Termination” was “Voluntary” and the purpose was to “assume employment elsewhere.”
Polygraph
In addition to a number of dueling motions among the parties, it appears that Respondent Rotundo moved to introduce the results of a polygraph test but was opposed by Claimant and Third-Pary Respondents because:
Respondent Rotundo did not give notice of the polygraph examination; Claimant and Third Party Respondents Rittenberg and Lama had no input into the circumstances of the examination; and, the polygraph report is not admissible into evidence under Florida law. In his Response to the Motion to Bar, Respondent Rotundo asserted, among other things, the following: since neither state nor federal rules are binding in FINRA arbitrations, the Panel can decide whether to admit the examination into evidence; and, a polygraph report is a valuable tool to arbitrators.
During the evidentiary hearing, the Panel granted the Motion to Bar the introduction of the polygraph.
The Nuance of UN-authorized
Partially at issue in this arbitration appears to be a somewhat festering dispute engendered by an apparent customer complaint, which Claimant Morgan Keegan characterized as alleging unauthorized discretionary trading that resulted in about $489,000 in damages – for which Claimant appears to be seeking indemnification/contribution. Although the issues are not satisfactorily set forth in the Decision, we are able to infer some aspects from this statement in the Decision:
In the Motion to Dismiss, Respondent Rotundo asserted, among other things, that the unauthorized trading claim must be dismissed where predicated upon violation of Rule 2510 as discretionary trading with oral authority is not “unauthorized trading.” During the evidentiary hearing. Claimant opposed the Motion. The Panel denied the Motion.
SIDE BAR: Actually, Respondent Rotundo raises an interesting point. NASD Conduct Rule 2510: Discretionary Accounts states in relevant part:
(b) Authorization and Acceptance of Account
No member or registered representative shall exercise any discretionary power in a customer’s account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010.
With certain exceptions (most notably an intraday “time and price” order), a broker cannot engage discretionary trading if he or she does not have prior written authorization from the customer that has been accepted in writing by the firm. If a customer grants oral authorization, however, while the exercise of discretion by the broker would still constitute a violation of Rule 2510, such trading would technically be with the customer’s authorization, albeit “oral” and not sufficient to overcome the proscription of the rule. While a hyper-technical distinction, the fact remains that a customer could orally authorize a broker to exercise discretion in his or her account, even though such authorization would not comply with the rules and would expose the broker to a violation.
Decision
The FINRA Arbitration Panel found Respondent Rotundo liable and ordered him to pay to Claimant with statutory interest accruing from the date of the Award until paid in full:
- $13,370.00 (inclusive of prejudgment interest);
- $720.00; and,
- $214,315.00 as contribution/indemnification.
The FINRA Arbitration Panel ruled that Claimant Morgan Keegan had defamed Respondent Rotundo pursuant to inappropriate language placed on his Form U5, and, accordingly, found Claimant liable and ordered it to pay to Respondent $500,000.00 plus statutory interest from the date of the Award until paid in full. Further, the Panel recommended that Respondent’s Form U5 filed on September 23, 2010, continue to reflect that the “Reason for Termination” was a “Discharge,” but that the “Termination Comment” on Respondent’s Form U5 be replaced with:
Exercising discretionary power in a customer’s account without prior written authorization.
Bill Singer’s Comment
Gotta tell ya — didn’t see this one comin’, not at all.
I sort of figured as I was reading through the Decision that the FINRA Arbitration Panel was disposed in Claimant Morgan Keegan’s favor. As to the polygraph issue, I inferred that Respondent Rotundo was adamant that he had not lied about something and, given the circumstances of the case, I figured that even if the Panel dismissed the evidence (which it did), the arbitrators may have been willing to give him some consideration. Apparently, Rotundo made some impression upon the Panel because they awarded less than half the damages sought by Claimant attendant to the alleged unauthorized discretionary trades.
What I can’t reconcile is just exactly what constituted $500,ooo in defamation? This Decision not only fails to present sufficient facts for us to understand what truly transpired but there is virtually no rationale offered to put the implications and inferences into context. Ultimately, Claimant Morgan Keegan really, really miscalculated here because it started this mess with the filing of its Statement of Claim and, whammo, it winds up with a net tab of some $300,000 — talk about wishing that you had left bad enough alone!
As to Respondent Rotundo, I feel that this Decision somewhat cheats him and does him a disservice. Re-read the ruling as many times as you wish but I doubt that you will come away with much more understanding than obtained by scratching your head and shrugging. Not only don’t I understand how the referenced statement on the Form U5 rose to a half million dollars in defamation but I don’t understand why this Panel even deemed in defamatory. No — I’m not saying it wasn’t defamatory and I’m not saying that the Panel got it wrong. What I am saying is that the Respondent in this case was owed a much clearer Decision so as to inform the public and the industry as to how grievously he was wronged.